Question: I want to retire next year, and I'm wondering: Should I keep my money in the stock and bond markets?
Answer: First things first: You will face a bear market in retirement.
For most folks who live to a ripe old age, it's inevitable. Bear markets are part of investing, and you should expect one or two per decade.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The timing here is critical. If you suffer a bear market after several strong years of stock returns, chances are good that it's not going to dramatically affect your lifestyle in retirement.
But if you have the misfortune to experience a bear market shortly after you retire, you might see your portfolio permanently impaired.
Let's dig into this. Say you're planning to retire next year: Should you keep your money in the stock and bond markets?
The answer is probably yes, though there are some major caveats and a handful of general rules to consider.
No two retirees are the same
You have one major priority in retirement: Ensuring you have enough income to cover your living expenses. Everything else is secondary.
Do a little math here. How much will you get every month in Social Security? Do you have other sources of guaranteed income, such as a pension or annuity?
Add these figures up, then compare them with your expenses. If your guaranteed income is enough to cover your baseline living expenses (or at least close), you can afford to take more risks with your portfolio. If the market hits a rough patch, it's not going to derail your retirement.
Let's consider another scenario: You're expecting major expenses early in retirement, such as buying a property or covering out-of-pocket medical expenses.
If you think you'll need the funds within the next four to five years, it probably makes sense to move them out of the stock market and into a short-term bond ladder or a money market fund.
Let's say you're somewhere in the middle: You plan to dip into your portfolio to cover your retirement expenses, but don't have any major imminent expenses.
What should you do?
A portfolio to start your retirement
You might live decades in retirement, so you need growth. Investing too conservatively could mean losing ground to inflation and seeing your living standards fall in your golden years.
But investing too aggressively could mean taking catastrophic losses that could permanently impair your portfolio.
How do you split that difference?
We're going to start with some general rules, which you should take with a large grain of salt. These aren't iron-clad laws of the universe. Think of them as a good starting point as you put your portfolio together.
All else equal, your portfolio should gradually glide from more aggressive to less aggressive as you age. The old rule was that your exposure to stocks should be 100 minus your age. If you're retiring at 65, you should have 35% invested in stocks and 65% invested in bonds or cash.
With life expectancies getting longer, 120 minus your age has become a common rule, as well. It might be best to think of it as a range of 100 to 120 minus your age. That 65-year-old could have something in the range of 35% to 55% in stocks, depending on your willingness and ability to take risks.
The 4% rule
You should also take the 4% rule to heart. Take a distribution of 4% of your portfolio your first year in retirement, then index it to inflation.
In a hypothetical million-dollar portfolio, you'd take a distribution of $40,000 the first year, then increase it by 2% to 3% per year.
Several studies, including the original work in the 1990s by financial planner William Bengen, have shown that 4% is a "safe" withdrawal rate. A retiree with a balanced portfolio should expect to live 30 years or more in retirement with very little risk of outliving their money.
You could probably do more than that. Bengen himself suggested earlier this year that a withdrawal rate of as high as 5.5% would likely be perfectly safe in most realistic market scenarios.
Of course, take your own longevity and any bequest motives in mind as well. If you aren't planning to leave an inheritance to your heirs and your family, or health history suggests you might not live all that long in retirement, you might as well take larger distributions earlier and really do retirement right.
Related content
-
S&P 500 Hits New High on Jobs Friday Eve: Stock Market TodayThe S&P 500 hit a new all-time closing high and most of the stocks in the Dow Jones Industrial Average were up the day before a critical jobs report.
-
New $6,000 'Senior Bonus' Deduction: What It Means for Taxpayers Over Age 65Tax Changes If you’re an older adult, a new bonus tax deduction could provide a valuable tax benefit. Here's how it works.
-
S&P 500 Hits New High on Jobs Friday Eve: Stock Market Today
The S&P 500 hit a new all-time closing high and most of the stocks in the Dow Jones Industrial Average were up the day before a critical jobs report.
-
SPACs, SMRs and How to Invest in the Nuclear InsurgencyBig nuclear deployments are in process, but small modular reactors could be a better way to meet rapidly rising electric power demand.
-
10 Ways to Stay Safe From Grandparent Scams and Other Fraud, Courtesy of a Financial PlannerScams are increasingly hard to detect, and anyone can be fooled, from older people to educated professionals. Here are 10 ways to avoid becoming a victim.
-
This Is How the Student Loan Bubble Is Primed to Pop, From a Student Funding ExpertFueled by easy money, inflated tuition and high default rates, the student loan bubble mirrors the 2008 subprime mortgage crisis. We could be headed for a potential financial collapse. What can we do?
-
Big Tech Names Rise Above Broad Weakness: Stock Market TodaySome familiar names enjoyed solid rallies on the resolution of outstanding questions, but macro uncertainty hangs over the broader market.
-
Klarna IPO: Should You Buy KLAR Stock?The Klarna IPO is expected to be one of the biggest offerings of the year, with the buy-now-pay-later firm expected to start trading next week.
-
Alphabet Stock Pops After Google Antitrust Ruling: What to KnowGOOGL stock is soaring Wednesday after a judge ruled that Alphabet does not have to divest its Chrome browser.
-
7 Mistakes to Avoid When You First Start InvestingInvesting brings the opportunity to build wealth, but there are plenty of mistakes that can be made. Here are seven common ones and how they can be avoided.
